New York Residents Face Critical Changes in Tax Debt Relief Through Bankruptcy in 2024
For New York residents struggling with overwhelming tax debt, 2024 brings important updates to IRS collection procedures and bankruptcy discharge rules that could significantly impact your financial recovery options. Understanding these changes is crucial for making informed decisions about managing tax obligations through bankruptcy proceedings.
The 3-2-240 Rule: Your Path to Tax Debt Discharge
The cornerstone of tax debt discharge in bankruptcy remains the “3-2-240 Rule,” which determines whether your federal tax debt can be eliminated. The 3-2-240 Rule is a shorthand reference to the time-related criteria that tax debts must meet to be considered dischargeable in bankruptcy. It encompasses three critical timelines related to the tax return’s due date, the actual filing date, and the IRS’s assessment of the tax debt.
For tax debt to qualify for discharge, it must meet these specific criteria:
- The tax debt must be related to a tax return due at least three years before the bankruptcy filing, including any extensions.
- The tax return was actually filed at least two years before the bankruptcy petition.
- The tax debt must have been assessed by the IRS at least 240 days before filing for bankruptcy or not assessed at all.
2024 Updates to IRS Collection and Bankruptcy Procedures
In 2024, the threshold filing amount for a bankruptcy estate was $14,600 (this amount is equal to the $14,600 standard deduction for married individuals filing separately). This adjustment affects how bankruptcy estates handle tax obligations and filing requirements.
New Yorkers filing for bankruptcy in 2024 must also be aware of updated federal rules. On December 1, 2024, the following Federal Rules of Bankruptcy Procedure, Official Bankruptcy Forms and Director’s Forms will be amended: Bankruptcy Rules Parts I through IX have been restyled and Bankruptcy Rules 1007, 4004, 5009, and 9006 have been amended to require an individual debtor to file a certificate of course completion in lieu of Official Form 423.
Chapter 7 vs. Chapter 13: Tax Debt Treatment in New York
The type of bankruptcy you file significantly affects how tax debt is handled. Chapter 7 discharge will eliminate (discharge) personal liability for tax debts older than three years unless your tax returns were filed late. However, Not all debts are dischargeable or eliminated. Many tax debts are excepted from the bankruptcy discharge.
For Chapter 13 cases, To qualify for Chapter 13, you must have regular income, have filed all required tax returns for tax periods ending within four years of your bankruptcy filing and meet other requirements set forth in the bankruptcy code. Some taxes may be dischargeable. Whether a federal tax debt may be discharged depends on the unique facts and circumstances of each case.
New York-Specific Considerations for 2024
New York residents benefit from updated exemption amounts that took effect in 2024. New York’s exemption amounts adjust every three years, and the amounts in this article reflect the April 1, 2024, adjustment. These exemptions help protect essential assets during bankruptcy proceedings.
The homestead exemption varies by county, with $204,825 in Kings, Queens, New York, Bronx, Richmond, Nassau, Suffolk, Rockland, Westchester, and Putnam counties. Vehicle exemptions allow protection of up to $5,500 in value or up to $13,625 if the vehicle is equipped for use by a disabled debtor.
Understanding Tax Liens vs. Tax Debt in Bankruptcy
It’s crucial to distinguish between tax debt and tax liens when considering bankruptcy. Unfortunately, in your bankruptcy filing, the court may not lift any prior tax liens against your property. This is because once an IRS or state authority tax lien is filed and recorded, it becomes a secured financial obligation in your bankruptcy proceedings.
However, The remaining lien from a dischargeable tax obligation will only be enforceable against assets owned by debtor at the time of the bankruptcy filing, and only to the extent of the assets’ value. This is very important because if the underlying tax obligation is discharged, the remaining lien will not attach to any assets acquired by the debtor after the bankruptcy filing.
The Automatic Stay and IRS Collection Activities
One of the immediate benefits of filing bankruptcy is the automatic stay. When you file a bankruptcy case, an “injunction” (a type of court order) called the automatic stay goes into effect to stop creditors, including the IRS, from starting or continuing collection activity, like sending you letters, garnishing your wages or bank account, or filing liens against your property.
The filing of a bankruptcy petition suspends most collection efforts. A bankruptcy discharge may provide relief to a taxpayer by reducing or eliminating certain debts. However, While in an open bankruptcy proceeding, a taxpayer is not eligible for an offer in compromise agreement.
Working with Experienced Legal Counsel
Given the complexity of tax debt in bankruptcy proceedings, working with qualified legal counsel is essential. A skilled Bankruptcy attorney New York can evaluate your specific situation, determine which tax debts may be dischargeable, and guide you through the process to achieve the best possible outcome.
Consult your bankruptcy attorney to determine which tax debts may be discharged. Professional guidance is particularly important because Many tax liabilities can be successfully dealt with in both Chapter 7 and Chapter 13, and an experienced bankruptcy attorney can be of immeasurable assistance in this very tricky area.
Planning Your Financial Fresh Start
For New York residents considering bankruptcy to address tax debt in 2024, timing and preparation are crucial. If all or part of the reason you are filing bankruptcy is overdue federal tax debts, you may need to increase your withholding and/or your estimated tax payments. For help determining the proper withholding, visit our online Tax Withholding Estimator.
Remember that During your bankruptcy case you should pay all current taxes as they come due. Failure to file returns and/or pay current taxes during your bankruptcy may result in your case being dismissed.
The 2024 changes to IRS collection procedures and bankruptcy rules create both opportunities and challenges for New York residents dealing with tax debt. By understanding these updates and working with experienced legal counsel, you can make informed decisions about using bankruptcy as a tool for financial recovery and achieving a genuine fresh start.